Choosing between a pension lump sum and a lifetime annuity comes down to three numbers: the implied interest rate the pension is offering, the income you would need to replace if you took the cash, and how the choice ripples into your tax bracket and Medicare IRMAA surcharges. For most 2026 pension offers, the lump sum wins on the math when the plan’s implied discount rate exceeds about 5–6%. The annuity tends to win for healthy couples in their early 60s who want bulletproof income and a strong joint-and-survivor benefit.
From the Retirement Planning hub — Evergreen Wealth Management — flat-fee retirement income, withdrawal, and Social Security planning for Massachusetts retirees.
I am Nick Stevens, CFP®, founder of Evergreen Wealth Management, a fee-only fiduciary firm in Boston, Massachusetts. We charge a flat monthly fee regardless of portfolio size, which means I do not earn more if you roll your pension into investments we manage — and that matters, because this is one of the most conflict-prone decisions in retirement planning.
What is the pension actually offering you?
A pension offer typically arrives as two side-by-side numbers: a one-time lump sum, and a monthly income for life. Sometimes you also get a third option — a joint-and-survivor annuity that pays a reduced amount while you are alive but continues 50%, 75%, or 100% to your spouse after your death.
Before doing any math, ask the plan administrator for three things in writing: the lump sum offer, the single-life monthly annuity, and every joint-and-survivor variant available. Plans are required to disclose these but not always to volunteer them. The relative pricing tells you what the plan thinks about interest rates and mortality — and that pricing is the entire game.
How do you calculate the implied rate the lump sum is paying?
The cleanest way to compare a lump sum to a lifetime annuity is to back into the “implied discount rate” the plan is using. In plain English: what rate of return would your lump sum need to earn, every year for life, to exactly replicate the monthly annuity?
You can run this in five minutes in Excel with the RATE function. The inputs:
- Nper: Your life expectancy in years (use the SSA period life table; a 65-year-old male averages about 17 more years, a 65-year-old female about 20)
- Pmt: The annual annuity payment (monthly times 12), entered as a negative number
- PV: The lump sum offer, entered as a positive number
- FV: 0
If the implied rate the plan is offering exceeds what you could reasonably earn in a balanced portfolio — net of fees and taxes — the annuity is generous. If the implied rate is lower, the lump sum is the better mathematical deal. I usually compare against 5–6% as a conservative real-world net-of-tax return for a retiree-appropriate portfolio in 2026.
A real example: $500,000 lump sum vs. $2,500/month annuity
Suppose a 65-year-old client gets this offer: $500,000 lump sum, OR $2,500/month for life ($30,000/year), OR $2,200/month with 100% to the surviving spouse.
| Scenario | Annual income | Years assumed | Implied rate | Verdict |
|---|---|---|---|---|
| Single life, age 65, average life expectancy (20 yrs) | $30,000 | 20 | ~2.4% | Lump sum wins on math |
| Single life, age 65, live to 95 (30 yrs) | $30,000 | 30 | ~4.6% | Coin flip |
| Single life, age 65, live to 100 (35 yrs) | $30,000 | 35 | ~5.4% | Annuity wins |
| J&S 100%, both spouses, second-to-die age 95 | $26,400 | 30 | ~3.7% | Lump sum wins on math, but loses on certainty |
This is why the answer is rarely “the annuity is a rip-off” or “the lump sum is a no-brainer.” The same offer can be terrible for a single 65-year-old with average health and excellent for a married couple in their early 60s with longevity in the family.
When does the lump sum win?
- Health concerns or shorter expected longevity. If you would not bet on living to 85, the math almost always favors the cash.
- You have other guaranteed income. Social Security at age 70, a working spouse’s pension, or substantial rental income reduces your need for another lifetime income stream.
- You want estate flexibility. A lump sum becomes an IRA balance your heirs can inherit; an annuity typically ends at death (or at the survivor’s death under a J&S option).
- You want tax control. A lifetime annuity is taxed as ordinary income every year and you cannot turn it off. A lump sum in an IRA gives you full control over which years to pull from, when to do Roth conversions, and how to manage Medicare IRMAA brackets.
- You distrust your former employer’s long-term solvency. Pensions are backstopped by the PBGC, but not in full — the 2026 maximum guaranteed benefit at age 65 is about $7,500/month for a single-employer plan, less for multiemployer plans.
When does the annuity win?
- You and your spouse are healthy and have longevity in the family. If even one of you lives to 95, the joint-and-survivor annuity often beats the lump sum by a comfortable margin.
- You have a strong COLA. A few corporate and most public pensions offer partial inflation adjustments. Replicating that with a private annuity costs roughly 25–30% more.
- You will not actually invest the lump sum well. If the realistic alternative is leaving the cash in money market funds or panic-selling in the next bear market, the annuity’s discipline is worth real money.
- You want to take Social Security off the worry list. A solid base of guaranteed income lets you delay Social Security to 70 and invest the rest more aggressively. We cover the timing math in detail in our piece on Social Security timing for Massachusetts retirees.
The tax and IRMAA implications most calculators ignore
This is where the standard online calculators fall apart. They compare pretax dollars on both sides and call it a day. In real life, two things move the needle:
Medicare IRMAA surcharges. Once your MAGI as a married couple crosses $218,000 in 2026, Medicare Part B jumps from $202.90 to $284.10 per person per month. Cross $342,000 and Part B jumps to $405.40. A lifetime annuity adds rigid income every year — you cannot turn it off in a year when you want to do a Roth conversion or harvest gains. A lump sum in an IRA gives you that lever back.
Massachusetts state income tax. MA taxes pension income at the flat 5% rate. If you ever move to a no-income-tax state (Florida, New Hampshire), federal law forbids the former state from taxing the pension income going forward — a small but real factor for Boston-area retirees considering a relocation.
For more on managing taxes year-by-year through retirement, see Tax-Efficient Withdrawals.
The PBGC backstop and credit risk
The Pension Benefit Guaranty Corporation insures most private-sector pensions. For 2026, a single-employer plan that fails will pay a retiring 65-year-old up to approximately $7,500 per month. A 100% joint-and-survivor option is capped lower (around $6,750). If your monthly benefit is below those caps, the PBGC backstop is meaningful and the annuity carries minimal credit risk. If you are looking at $9,000+ per month from a financially shaky former employer, the lump sum effectively buys you out of that credit risk.
How the rollover mechanics actually work
If you take the lump sum, the cleanest path is a direct trustee-to-trustee rollover into a Traditional IRA. No taxable event, no 20% mandatory withholding, no 60-day deadline. If the check is made payable to you personally, the plan must withhold 20% for federal taxes and you have 60 days to deposit the full pretax amount. The mechanics are nearly identical to a 401(k) rollover — we walk through them in What Should I Do With My 401(k) When I Leave My Job?
How a flat-fee advisor approaches this
Most advisors are paid as a percentage of assets under management. A $500,000 lump sum that becomes an IRA they manage is worth roughly $5,000 per year to a 1% AUM advisor — every year, indefinitely. A pension annuity is worth nothing to them. The conflict is structural and impossible to neutralize with disclosure alone.
At Evergreen Wealth Management we charge a flat monthly fee regardless of portfolio size. Whether the right answer is the annuity, the lump sum, or some combination, our fee is the same. You can see our background here and real client scenarios here.
Frequently Asked Questions
Can I take part lump sum and part annuity?
Some plans allow a partial lump sum (often 50/50 or 25/75), but most are all-or-nothing. The partial option, when available, is often the best of both worlds: enough guaranteed income to cover essential expenses, with the rest invested for flexibility and growth. Ask the plan administrator specifically — the option is sometimes not in the standard election packet.
What happens to my pension if I die before I start collecting?
If you are married, federal law generally provides a qualified pre-retirement survivor annuity to your spouse. The benefit is usually equal to what your spouse would have received under a 50% joint-and-survivor election. If you are unmarried, the answer depends entirely on plan rules — many provide nothing, which is itself an argument for considering the lump sum if you have no spouse and want the balance to pass to heirs.
How does Evergreen Wealth Management charge for analyzing a pension decision?
We charge our standard flat monthly fee, which covers all financial planning work including pension election analysis. We do not charge a separate “project fee” for the pension decision, and we do not earn more if you decide to take the lump sum and roll it into investments we manage. The recommendation is identical either way.
Should I buy a private annuity if I take the lump sum?
Rarely. If you want lifetime income, the pension annuity is usually priced more favorably than what an insurance company will sell you on the retail market — because the pension annuity has no commission and no insurance company profit margin. If the pension annuity is generous, take it. If it is not, do not assume a retail annuity will be better; usually it is worse.
The bottom line
Calculate the implied rate, compare it to a realistic 5–6% net portfolio return, account for IRMAA and tax flexibility, factor in your health and your spouse’s, and then decide. The answer is rarely obvious from the offer letter alone — but it is almost always knowable with a few hours of careful work.
If you have a pension election in front of you and want a second set of eyes, reach out to schedule a conversation. We work with retirees and pre-retirees across Massachusetts and nationwide on exactly these decisions.
Nick Stevens, CFP® is the founder of Evergreen Wealth Management in Boston, a flat-fee financial planning and investment management firm. Evergreen charges a fixed monthly fee regardless of portfolio size. Learn more about how we work at our fee structure page or get in touch at our contact page.